Federal Tax Changes Could Hit NJ Municipalities with ‘Double Whammy’

Possible elimination of deduction for state and local taxes has received lots of attention, but ending of tax-exempt status for certain bonds could also hurt New Jersey

As Congress is working to advance an ambitious plan to rewrite the federal tax code, most of the attention in New Jersey has been focused on a proposal to scale back or even eliminate the SALT deduction for state and local taxes. But many communities across the state could also see a big impact from new tax rules that are being proposed for investments in major building projects.

A largely overlooked section of the tax-overhaul legislation the U.S. House of Representatives passed earlier this month calls for an ending of the tax-exempt status of so-called private-activity bonds, which are often used to finance things like hospital facilities, university buildings, affordable housing, and infrastructure projects.

New Jersey, with its high population density, is particularly linked to the types of projects that have benefitted from such tax-exempt financing, with the recent redevelopment of the Hahne & Co. building in Newark and the rebuilding of the Goethals Bridge between Elizabeth and Staten Island among those that have used private-activity financing in recent years.

While the proposed new tax rules wouldn’t prevent governments themselves from issuing tax-exempt bonds, local leaders are concerned they could make it a lot harder and more expensive to finance the type of private-sector investment that is often encouraged as part of an overall economic-development strategy. The local governments, meanwhile, could also get hit by another part of the tax legislation that would affect debt-refinancing issues. Financial experts warn the tax overhaul could also hold back the construction industry if some building projects end up being shelved altogether.

After focusing for much of this year on unsuccessful efforts to roll back the Affordable Care Act, also known as Obamacare, President Donald Trump and leaders in the Republican-led Congress have made the passage of a large-scale overhaul of the federal tax code that was first put forward in April a top priority for the remaining weeks of 2018. Although there currently are dueling bills in the House and Senate, both call for a significant reduction of corporate tax rates to help generate more economic growth, and for major changes to the way the federal government taxes large estates.

Only Rep. Tom MacArthur voted in favor of House bill

The House and Senate bills also call for changes to personal income tax rates and brackets, and for a rewriting of several income-tax deduction and exemption rules to help pay for the tax cuts. They include the so-called SALT deduction that is currently allowed for state and local taxes, including property taxes.

A loss of the SALT deduction would hit many in New Jersey — where the average property tax bill costs $8,549 — especially hard. Only one member of the state’s congressional delegation, Rep. Tom MacArthur (R-3), voted in favor of the House bill, which would eliminate the deductibility of state income and sales taxes, and place a $10,000 limit on the property tax write-off.

Right now, the elimination of tax-exempt status for private-activity bonds, or PABs, is only in the House’s tax bill. But, with federal lawmakers expected in the coming weeks to begin merging the Senate and House measures, it could end up in the final version that would go to the White House for consideration. Since the PAB tax exemption, by some estimates, would cost up to $40 billion in lost revenue over a decade, there are fears that it could end up being used to help ease concerns among many GOP lawmakers that the proposed tax cuts will add too much to an already sizable federal deficit.

While PABs have been criticized in the past, particularly when they’ve been used to help finance new stadiums for professional-sports teams, many other types of projects frequently benefit from private-activity financing, including hospitals and university facilities, said Emilie Ninan, who chairs the public-finance department at the Philadelphia-based Ballard Spahr law firm. “All of us actually use facilities financed by these bonds,” Ninan said.

Key economic-development tool in peril

The loss of the tax-exempt status wouldn’t cut off projects from getting financing altogether, but PNC municipal strategist Tom Kozlik wrote in a recent summary of the federal-tax proposals that it could cause issuers to instead use taxable bonds. “The problem is they are more expensive and the cost will rise relative to the current market as interest rates rise,” Kozlik wrote.

A letter the National League of Cities sent earlier this month to members of Congress, which was also signed by the New Jersey State League Municipalities, called for the tax-exempt status of PABs to be allowed to continue as a key economic-development tool for local leaders.

“PABs help spur private investment and allow state and local governments to harness the private sector’s experience and expertise toward public projects and initiatives, and therefore should be preserved and enhanced,” the letter said.

Ninan said another concern for municipal governments is the proposed elimination of a key refinancing tool that’s known as “advance refunding.” That could come at the same time local officials could see a revenue loss from the proposed changes to the SALT deduction, which is expected to depress property values throughout the state as taxes go up for as much as 40 percent of New Jersey residents.

“I think there are a lot of hidden costs here,” Ninan said of the proposed tax legislation.